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Value Capture: Practice in the Netherlands vs. USA

Value Capture

Bicycle facility design is unquestionably superior in The Netherlands when compared to the U.S. and almost anywhere else in the world. But designs are easily transferrable; plans, dimensions, and photos can be brought back to the states for inspiration in improving facilities. This has already been done and continues to be done in specific areas of the U.S. (mostly in urban areas). Bicycle facility design is not some arcane science only the Dutch are capable of.

So if design isn’t the issue, is political will the problem? In many areas, that is no longer the case. Many urban areas now see the irreplaceable value of great bicycle infrastructure. The problem is not lack of the will to build, it’s lack of funding and the will to change how we fund infrastructure.

Unfortunately, policy is not so easily transferable as design. The Netherlands (and Europe in general, to varying degrees) have long used value capture to finance infrastructure. The main idea behind value capture is that the value created by the infrastructure (manifested in real estate value and goods pricing) is used to finance the infrastructure. This is an abstract concept that cannot be glossed over. A house with a road built to it is worth more than a home where the buyer would have to build a road to access it. Roads are generally built (or at least maintained in the case where developers constructed the roads) by public entities, like towns, cities, and states. So shouldn’t the public entity be able to receive some (or all) of this value created in order to pay for the road? Currently our system has the municipality gaining that value through property taxes, which are anything but transparent.

In the U.S., property taxes are based on some established portion (called the Mill Rate) of the overall “assessed value” of a parcel. The Mill Rate is adjusted based on the funds needed to meet the anticipated annual municipal budget, and so functions as a flat percentage tax on the assessed value of all taxable real estate within a municipality. The assessed value is appraised by a municipal assessment office, which uses data about the housing and commercial real estate markets to assess the market value of a piece of land and its improvements (e.g. buildings). Now obviously, some portion of the assessed value of home (or commercial building, etc.) is going to represent the value of its associated public infrastructure. A house with sewer/water service will be worth more than a house without, all else (location, housing type, land size, etc.) being equal. That portion to which the value of sewer/water service can be attributed is never made transparent. Understandably, this is complex to calculate, but hardly impossible to estimate. Hedonic regression is a common tool in the literature for analyzing value added by infrastructure assets.

So one could try to say that the U.S. captures the value of infrastructure in the assessments of real estate property; but the amounts are not explicit, and the payment occurs piece meal (over many years), which could very easily lead to some fudging of the economic values of infrastructure. Many would say that the values “come out in the wash”, but why then are municipal budgets failing around the country while infrastructure is under-provided and under-maintained? Portland is currently trying to implement a street “user fee” in order to meet the shortfalls anticipated in meeting infrastructure provision and maintenance needs. This seems an (unfortunately necessary) afterthought. The value of infrastructure should be incorporated explicitly into real estate pricing, so that those who need more infrastructure (those who live on the edge of town in cul-de-sacs but still want roads, city sewer/water, electricity, etc.) can pay more for their market choices, while owners of real estate in areas where infrastructure is cheaper to provide (where economies of scale and agglomeration are present, namely dense, mixed use areas) can pay less for their market choices.

Houten

Houten, a suburban town outside of Utrecht, used value capture ingeniously to pay for infrastructure provision and add to its tax base. Before Houten was constructed in the 1970s, real estate investors had slowly bought all of the land that was planned to be used for Houten. When the town was ready to start building, the investors sold the land to the municipality to install roads, utilities, and partition the lots according the master development plan. After the necessary infrastructure was installed, the municipality sold the prepared lots back to the real estate investors at a higher price; namely a price which incorporated the value of the infrastructure installed. The real estate investors then sold the lots to buyers at some higher price to make their cut of profit. The residents continue to be taxed for the maintenance of the infrastructure, but the capital costs are all paid in this transaction.This may seem simple, but this almost never happens in the U.S.

In the U.S., most new developments are not master planned by a municipality (this is changing slowly, as comprehensive planning takes a bigger role in metropolitan areas) to fit in with their long range transportation and land use plans. Subdivisions are developed separately, with the developer building the necessary infrastructure, with the intention that municipality will maintain it after the new roads/buildings are incorporated into the municipality. This is part of Chuck Marohn ingeniously calls the Suburban Ponzi Scheme, where new growth provides municipalities with the illusion of prosperity, until those maintenance payments come due.

Houten is sub-urban, in that it is less dense than the central city of Utrecht, but it is far from an American suburb. It has superior transportation facilities for every mode. 40% of all trips within Houten are made by bicycle. Both comprehensive planning and and a well executed transportation financing scheme are responsible for this community. Urban planners and transportation finance policy makers in the U.S. have a lot to learn from Houten.